WSJ: Big Developers Dabble in Apartment Market

You’ve probably heard the saying that “misery loves company.”  Well, if misery loves company then success attracts company and according to the Wall Street Journal the recent strength of the apartment market is drawing in some large commercial property companies that haven’t traditionally been involved with apartments:

Fueled by the decline in home ownership, the boom in apartment building is attracting commercial-property companies such as Boston Properties Inc., Mack-Cali Realty Corp., SL Green Realty Corp.,Simon Property Group Inc. and MacerichCo. They all have either acquired, completed or broken ground on apartment buildings in recent months, or plan to do so next year.

The companies’ moves are helping fuel a boom in rental apartment development and investment. The Commerce Department said Tuesday that construction starts in the multifamily sector in November spurted 25.3% from the previous month. Single-family housing starts rose just 2.3%.

Many of the nation’s biggest office and retail developers are getting in the apartment game for the first time. For example, Macerich, a mall giant whose holdings include Scottsdale Fashion Square in Arizona and Queens Center, in New York, is building a 430-unit apartment tower at its Tysons Corner Mall in Virginia. The company says it also is exploring building apartment units at its Broadway Plaza mall in Walnut Creek, Calif.

As our members know managing apartments requires a unique skill set and that fact isn’t lost on some of the developers sticking their toes in apartment waters:

Apartments require a far different skill set than retail or offices. Turnover is high, so landlords constantly have to adjust prices to fill empty units. Tenants can easily be lured away by something newer, better located or offering more modern amenities. Landlords also have to worry about the economy worsening—plenty of apartment owners had to reduce rents after the financial crisis—and the for-sale market making a comeback.

Mr. Linde at Boston Properties said that because apartments aren’t the company’s expertise it has hired outside companies to be responsible for the leasing and day-to-day management of the properties. That will likely reduce profits, but the company won’t have to take on additional overhead, he pointed out.

Sounds like there might be some opportunities for third party management deals.